1. Macroeconomics: Introduction and History
  2. Macroeconomics: Schools Of Thought
  3. Macroeconomics: Microeconomics Foundation
  4. Macroeconomics: Supply, Demand and Elasticity
  5. Macroeconomics: Money And Banking
  6. Macroeconomics: Economic Systems
  7. Macroeconomics: Inflation
  8. Macroeconomics: The Business Cycle
  9. Macroeconomics: Unemployment
  10. Macroeconomics: Economic Performance and Growth
  11. Macroeconomics: Government - Expenditures, Taxes and Debt
  12. Macroeconomics: International Trade
  13. Macroeconomics: Currency
  14. Macroeconomics: Conclusion

By Stephen Simpson

The field of macroeconomics is organized into many different schools of thought, with differing views on how the markets and their participants operate.

Classical economists hold that prices, wages and rates are flexible and markets always clear. As there is no unemployment, growth depends upon the supply of production factors. (Other economists built on Smith's work to solidify classical economic theory. For more, see Adam Smith: The Father Of Economics.)

Keynesian economics was largely founded on the basis of the works of John Maynard Keynes. Keynesians focus on aggregate demand as the principal factor in issues like unemployment and the business cycle. Keynesian economists believe that the business cycle can be managed by active government intervention through fiscal policy (spending more in recessions to stimulate demand) and monetary policy (stimulating demand with lower rates). Keynesian economists also believe that there are certain rigidities in the system, particularly "sticky" wages and prices that prevent the proper clearing of supply and demand.

The Monetarist school is largely credited to the works of Milton Friedman. Monetarist economists believe that the role of government is to control inflation by controlling the money supply. Monetarists believe that markets are typically clear and that participants have rational expectations. Monetarists reject the Keynesian notion that governments can "manage" demand and that attempts to do so are destabilizing and likely to lead to inflation. (Learn how Milton Friedman's monetarist views shaped economic policy after World War II. For more, see Monetarism: Printing Money To Curb Inflation.)

New Keynesian
The New Keynesian school attempts to add microeconomic foundations to traditional Keynesian economic theories. While New Keynesians do accept that households and firms operate on the basis of rational expectations, they still maintain that there are a variety of market failures, including sticky prices and wages. Because of this "stickiness", the government can improve macroeconomic conditions through fiscal and monetary policy.

Neoclassical economics assumes that people have rational expectations and strive to maximize their utility. This school presumes that people act independently on the basis of all the information they can attain. The idea of marginalism and maximizing marginal utility is attributed to the neoclassical school, as well as the notion that economic agents act on the basis of rational expectations. Since neoclassical economists believe the market is always in equilibrium, macroeconomics focuses on the growth of supply factors and the influence of money supply on price levels.

New Classical
The New Classical school is built largely on the Neoclassical school. The New Classical school emphasizes the importance of microeconomics and models based on that behavior. New Classical economists assume that all agents try to maximize their utility and have rational expectations. They also believe that the market clears at all times. New Classical economists believe that unemployment is largely voluntary and that discretionary fiscal policy is destabilizing, while inflation can be controlled with monetary policy.

The Austrian school is an older school of economics that is seeing some resurgence in popularity. Austrian school economists believe that human behavior is too idiosyncratic to model accurately with mathematics and that minimal government intervention is best. The Austrian school has contributed useful theories and explanations on the business cycle, implications of capital intensity, and the importance of time and opportunity costs in determining consumption and value. (For related reading, see The Austrian School Of Economics.)

Macroeconomics: Microeconomics Foundation

Related Articles
  1. Insights

    Monetarism: Printing Money To Curb Inflation

    Learn how Milton Friedman's monetarist views shaped economic policy after World War II.
  2. Insights

    Inflation for Dummies

    Inflation may seem like a straightforward concept, but it is more complex than it appears. We examine its varieties and causes.
  3. Insights

    A Look At Fiscal And Monetary Policy

    There's a debate over which policy is better for the economy. Find out which side of the fence you're on.
  4. Investing

    Deflation and Debt: Is the United States the New Japan?

    Discover how mainstream macroeconomics has failed Japan and why the United States should take care to avoid Japan's borrow, spend and print model.
  5. Personal Finance

    Economics 101

    Economics is the study of how individuals, governments, businesses and other organizations make choices that effect the allocation and distribution of scarce resources.
  6. Insights

    Stagflation, 1970s Style

    Find out how Milton Friedman's monetarist theory helped bring the U.S. out of the economic doldrums.
  7. Financial Advisor

    Is Private School for Your Child a Good Value?

    Parents want their kids to get a good education, but whether or not private school is worth it depends on more than just the cost.
  8. Trading

    Giants Of Finance: John Maynard Keynes

    This rock star of economics advocated government intervention at a time of free-market thinking.
  9. Insights

    What Causes Bubbles?

    A look at how asset bubbles are formed according to different schools of thought.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center